Striving for Sustainability in Banking: Evidence from Socio-Environmental Guidelines in Brazil

Abstract

We explore the adaptation of bank lending to environmental policy restrictions and its cross-sectional implications for the performance of borrowing firms. In April 2014, the Central Bank of Brazil introduced a socio-environmental policy (PRSA) designed to compel banks to reduce lending to highly polluting firms. The eleven largest banking conglomerates were given nine months to comply, while all other banks were granted an additional six months before the PRSA came into effect. We merge data from the full corporate credit registry (SCR) to the Ministry of Environment’s registry of potentially polluting activities (CTF/APP), which covers 390,000 unique firms from 2011 to 2019. We also incorporate bank financial statements (COSIF), firm employment data (RAIS), and other relevant bank- and firm-level characteristics. First, we document that the largest banks began reducing lending to highly polluting firms immediately after the PRSA announcement, while smaller banks only did so after the policy was enacted. Second, using an event-study analysis, we find that the largest banks with high ex-ante loan exposures to polluting firms substantially reduced their credit supply. Specifically, firms with high pollution potential encountered a credit contraction of 23% immediately after the PRSA announcement, whereas firms with low pollution potential were unaffected by the policy shift. Third, smaller banks cut their loan supply to highly polluting firms by 32%. Overall, our findings show that banks adapt to a tightening of climate-related regulation in advance.